The Stock Market Game Week in Review: March 30
While your students (and possibly some of you) might have been wondering how Sanjaya Malakar managed to survive another week on American Idol, one topic of discussion on Wall Street last week was the possibility of saying goodbye to quarterly earning targets.
What are they? The Securities and Exchange Commission requires every publicly held U.S. company to publish a quarterly report, officially known as Form 10-Q, describing its financial results for the quarter. This report and the predictions that market analysts make about it often have an impact on a company's stock price.
For example, if analysts predict that a certain company will have earnings of 55 cents a share in a quarter and if the results beat those expectations, the price of the company's stock might increase. But if the earnings are less than expected, even by a penny or two, the stock price characteristically drops, at least for a time.
The practice of issuing guidance on quarterly earnings has come under fire recently because some business leaders feel the focus on short-term targets undermines investment in long-term projects as well as long-term growth. Many CEOs refer to the issuing of guidance and the quarterly reports as "the tyranny of quarterly earnings." The laserlike focus Wall Street analysts place on quarterly earnings coupled with the regulatory burdens of Sarbanes-Oxley has been a leading contributor to the private equity boom. If you want to learn more about private equity, watch this video from TheStreet.com TV:
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